Buffett’s Longtime Partner Is Dead… Long Live the Wisdom of Charlie Munger

Last week Charlie Munger – Warren Buffett’s longtime business partner and closest friend – died at age 99.

During his life, he and Buffett helped build one of the greatest fortunes in U.S. history.

Buffett nicknamed Munger “the abominable no-man” for his ferocity in rejecting potential investments.

It was Munger, in fact, who taught him to stop buying fair companies at fabulous prices and start buying fabulous companies at fair prices.

Why? Because their ability to produce reliable cash flows would soon more than compensate for the premium paid upfront.

Although he graduated from Harvard Law School, Munger described himself as self-educated.

The key to success in life, both financial and otherwise, he insisted is “elementary, worldly wisdom.”

What is that, exactly?

Munger believed we should all strive for a liberal arts education by persistent reading of science, philosophy, religion, history and literature.

This allows you to think broadly and systematically and build a latticework in your head, a mental model of reality drawn from many disciplines.

Unfortunately, we live in a society that increasingly values specialization over breadth.

(The right balance is to strive to know something about everything – and everything about something.)

Too many students learn how to make a living, but not how to make a life. Yet the two are hardly exclusive.

In his commencement address at the USC Gould School of Law in 2007, Munger declared that…

Wisdom acquisition is a moral duty… I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up and boy does that help, particularly when you have a long run ahead of you… Nothing has served me better in my long life than continuous learning.

Few of us live surrounded by worldly philosophers and financial geniuses.

Moreover, newspapers and magazines are so full of fresh trivialities that the quest to become well-informed may actually prevent us from becoming educated.

And so we turn to books. The goal is not to collect information but to gain understanding.

As Munger says, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.”

Good readers become better thinkers.

Good thinkers, in turn, make better workers, better spouses, better parents, better friends, better citizens, better human beings.

And, as Munger proved, better investors.

Becoming a better investor is the raison d’être for these columns.

In a Wall Street Journal interview with Jason Zweig, Munger said…

Both Warren and I feel it’s our moral duty to be as rational as we can possibly be. A lot of people who are brilliant in some ways tend to make these utterly asinine decisions in other ways. We both tend to collect the asininities of the world in a kind of checklist. And we try to avoid everything on the checklist.

Not a bad idea.

Over the years, I’ve made my own checklist of investor asininities. (I’m sure there is substantial overlap with Munger’s.)

As a basic starting point, make sure you cannot truthfully check any of the boxes in “The Dangerous Dozen”:

1. I’m completely out of the market because I’m nervous about the future.
2. I’m heavily leveraged because I’m excited about the future.
3. I turned all my assets over to a financial advisor since I’m not qualified to manage my own money.
4. I’m paying my mutual fund a ton of fees because the manager has excellent past performance.
5. I’m buying stocks because the economic forecast is good. (Or… I’m selling my stocks because the economic forecast is poor.)
6. I’m buying stocks because the market is in an uptrend. (Or… I’m selling my stocks because the market is in a downtrend.)
7. I’m loading up on this one company because I feel really good about it.
8. I’m selling this winner because you never get hurt taking a profit.”
9. I’m selling this one because it hit my broker’s price target.
10. I’m holding this stock because it’s worth less than what I paid for it.
11. I’m moving out of stocks until the investment outlook improves.
12. I’m buying hundreds of stocks because I want to be adequately diversified.

We could talk about each of these in greater detail and most certainly will at a future date.

But the bottom line is this: If you’re invested in equities because of last quarter’s GDP growth, current market trends, likely Fed policy, changing political events, your own positive emotions or your advisor’s newfound bullishness, you’re not just making a mistake.

In Munger’s apt description, you’re being an asinine investor.

Your serious money deserves to be handled in a serious way. That means you need to know exactly what you’re doing and why you’re doing it.

Financial markets distribute wealth to people who have a plan and can execute it from those who don’t… or can’t.

That’s never changed. And it never will.

Charlie Munger is gone. But for those of us who follow the sage advice that made him one of the world’s wealthiest men, his common-sense investment approach lives on.